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Leverage Buyout Analysis Click to edit Master title style
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Overview of PE Funds TYPE
EXAMPLES
Mega Funds
Large Cap. & Mid Market Funds Distressed Debt Hedge Funds Growth Equity Funds
VC Funds
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A brief history of PE funds Key events / waves in the history listed below
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4
1901 First LBO deal: J.P. Morgan & Co. bought out the Carnegie Steel Corporation for $480 million
2003 – 2008 The Golden Age of Private Equity and large scale LBO deals: Harra’s Entertainment, Caesars Entertainment
2
5
1946 First PE firms: American Research and Development Corporation and J.H. Whitney & Co.
2008 – 2011 The credit crunch: less attractive targets, larger equity cheques,
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6
1988 Largest deal: KKR took over RJR Nabisco for $25bn
2012 – 2013 Back in the game: maturity wall, new wave of large cap deals
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Overview of a LBO analysis A method which estimates the value of a business for a financial buyer Introduction A leveraged buyout valuation estimates the value of a
business, to a financial investors who wants to achieve a target return based on: ― Internal rate of return (“IRR”) ― Cash on cash multiple/ money multiple (“CoC”)
It is a very “individual” valuation, which depends on the
amount of debt which can be raised for a LBO transaction, the price of the debt etc…
Key comments Returns expected depends on the nature of the assets
(infrastructure, startup etc…) and on the nature of the investors (private equity firm, venture capital firm, infrastructure fund, pension fund etc…)
In a LBO transaction, the main factors which determinate a
How to run a LBO valuation 1. Build the operating model and projections for the business
2. Set the maximum amount of debt which can be raised to finance the transaction, based on:
― Type of asset ― Current debt market dynamics and macro-economic
environment
― Capacity of the business to repay the debts
3. Assume value at exit 4. Calculate returns and run returns sensitivities on ― Exit year ― Leverage ― Acquisition and exit multiple
return are: ― Time
― Capital structure at acquisition ― Business performance of the asset during the holding
period
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Financing a LBO SENIOR BANK DEBT
MEZZANINE
Provided by commercial banks
A loan that may have warrants
Lowest default risk in the capital structure
Interest cash or PIK (paid in kind)
Restrictive maintenance covenants Floating interest rate Price at spread over LIBOR / EURIBOR
HIGH YIELD
COMMON EQUITY
Listed / given rating by credit agencies
Provided by financial sponsors and management team
Bridge loan usually issued
Riskiest investment in the capital structure ― No downside protection with unlimited upside potential
Fixed interest rate
Investors usually expect a 20% IRR
Limited flexibility in raising additional debt Priced at spread over government bond
HIGH YIELD MEZZANINE COMMON EQUITY CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright
HIGHER RISK AND RETURN
SENIOR DEBT
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Capital Structure Considerations – Cont’d Example of S&U
LTM EBITDA: £45m Acq. Multiple: 10.0x LTM EBITDA Net Debt to be refinanced: £100m Cash required on balance sheet: £20m Funding: 50% Debt / 50% Equity (in GBPm) Sources Term Loan Total Senior
Amount x EBITDA % of cap 240 240
5.3x 5.3x
50.0% 50.0%
Other Debt Total Junior
-
-
-
Total Debt
240
5.3x
50.0%
Equity Sponsor
240
5.3x
50.0%
Total Equity
240
5.3x
50.0%
Total Sources
480
10.7x
100.0%
(in GBPm) Uses
Amount x EBITDA
Pricing
Equity Purchased Net Debt to be refinanced
350 100
7.8x 2.2x
Total Acquisition
450
10.0x
Fees-sponsor Fees-financing
4 2
0.1x 0.1x
1.00% 1.00%
Fees-transaction
5
0.1x
1.00%
Total Fees
10
0.2x
Cash required on BS
20
0.4x
Total Uses
480
10.7x
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Key drivers We can count 3 main leverages in a LBO transaction. Returns are influenced by time Financial leverage $100m valuation
Equity Enterprise Value
Debt
Company repays debt
Equity Debt
Operating leverage
Enterprise Value
Equity Debt
Equity Debt
Company is acquired at 10.0x EBITDA of $10m Company performs well and reach EBITDA of $15m and is sold 10.0x EBITDA
Multiple expansion
Enterprise Value
Equity Debt
Equity Debt
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Company is acquired at 10.0x EBITDA of $10m The sector becomes more attractive and the company is sold 15.0x EBITDA of $10m 7
LBO - Generating returns How to increase equity value? DELEVERAGING
1,000
1,000
MULTIPLE EXPANSION
1,000
1,200
EBITDA GROWTH
1,000
Net Debt
Equity
1,200
COMBINATION 1,440 1,000
Entry
Exit
Entry
Exit
Entry
Exit
Entry
Exit
EBITDA
100
100
100
100
100
120
100
120
EV/EBITDA (x)
10
10
10
12
10
10
10
12
Net Debt
600
300
600
600
600
600
600
300
Equity
400
700
400
600
400
600
400
1,140
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